“Financial firms are progressively investing in commodity derivatives as a portfolio hedge since returns in the commodity sector seem uncorrelated with returns to other assets. While this ‘financialisation of commodities’ is generally not viewed as the source of price turbulence, evidence suggests that trading in futures markets may have amplified volatility in the short term.”
United Nations Food and Agricultural Organisation (FAO) (2010) . Price Volatility in Agricultural Markets . Economic and Social Perspectives Policy Brief 12
“Due to the increased participation of financial players in those markets, the nature of information that drives commodity price formation has changed. Contrary to the assumptions of the efficient market hypothesis (EMH), the majority of market participants do not base their
trading decisions purely on the fundamentals of supply and demand; they also consider aspects which are related to other markets or to portfolio diversification. This introduces spurious price signals to the market.”
“The financialisation of commodity futures trading has made commodity markets even more prone to behavioural overshooting.”
United Nations Conference on Trade and Development (UNCTAD) (2011) : Price Formation in Financialised Commodity Markets: the Role of Information
“While the debate on the relative importance of the multiple factors influencing commodities prices is still open, it is clear that price movements across different commodity markets have become more closely related and that commodities markets have become more closely linked to financial markets.” “Real market forces in these diverse markets are largely independent of one another, and therefore price changes should be essentially uncorrelated.
This was clearly true historically; from 1984 through 1999 average correlation between all commodities was only 7%. In 2007 this average rose to 64%. Correlation with the GSCI was 23% historically, and rose to 76% in 2007. Index speculation has swamped real market forces.”
House of Commons Select Committee on Science & Technology of the UK (2011)
“We find an overall increase of the level of short-term endogeneity since the mid-2000s to October 2012, with a typical value nowadays around 0.6–0.7, implying that at least 60–70 per cent of commodity price changes are now due to self-generated activities rather than novel information.” (This estimate seems rather at the high end, Ob)
Filimonov, Vladimir (ETH Zurich) / Bicchetti, David (UNCTAD) / Maystre, Nicolas (UNCTAD) / Sornette, Didier (ETH Zurich) (2013): Quantification of the High Level of Endogeneity and of Structural Regime Shifts in Commodity Markets
ECONOMICS IN CONTEXT 